February 11, 2013

China's $132 Billion Missed Opportunity

In the jostle for tickets at the Beijing Railway Station, Zhang Qi never felt the knife that slit his jacket open. In a flash, a thick wad of cash had been lifted from his pocket. It was more than RMB 5,000 ($800)—his entire years’ savings.

Zhang Qi is a migrant worker. He is among a floating population of 250 million strong with no legal status that has been the backbone of China’s incredible growth story. Migrants like him have flooded booming Chinese metropolises in a search of economic opportunity, transforming a country of isolated cities into one of tethered, transient networks.

But access to financial services has not kept pace with this increasingly transient population. Many migrant workers lack even the most basic means to save for their children’s education, make purchases on credit, protect their homes through insurance, and send and receive money. Theirs is an almost entirely cash-based economy, with savings kept, quite literally, under the mattress.

The domestic remittances migrants carry home, typically once per annum during the Lunar New Year, are the lifeblood of their families’ economic security. When the cash is stolen, so too are their livelihoods.

Zhang Qi had been working to save RMB 150,000 ($24,000), so that his two sons, who are still in primary school, could build homes one day. On his current earnings, he will need approximately 30 years to save enough. Now, he is one year behind.

The issue of financial exclusion has come to the fore only recently in China. Over the last five years, China’s “Big Four” banks have closed a combined 30,000 branches in poor and rural regions, as a result of market pressures and an increasing focus on high-margin, low-risk populations. On average, rural residents have 0.36 banking outlets per 10,000 people, far below the national average of 1.34.

Even in urban areas where bank branches are numerous, service offerings are designed for middle- and upper-middle class markets, providing limited utility to migrant workers at best and stigmatizing them at worst.

Zhang Qi actually had a bank account and had heard bank transfers were possible. When he went to the branch near his worksite to inquire about how the fees worked, he was brushed off by the staff. His out-of-province accent and ragged clothes made him an unwanted customer. He decided to carry his money by hand—at great risk—rather than face further humiliation at the bank.

More commonly, migrant workers leverage existing community connections to store and move money. The near absence of formal financial institutions in the economic life of this population has led to a proliferation of informal service providers. These may include family and friends, rotating savings and credit associations (hehui), money houses (qian zhuang), loan sharks (gao li dai), and, perhaps most significantly, laobans.

Laobans are managers and middlemen. They arrange contracts with employers and then take responsibility for recruiting and overseeing hundreds of temporary workers. Laobans are often connected to their workers by only a few degrees of separation, even hailing from the same village. The foundation of most migrant workers’ sustenance is their relationship to a laoban.

It’s no surprise then that many migrant workers rely on their laobans to keep their wages safe and send money to their families. This reduces the risk of theft for migrants, especially for those living in communal dormitories, and adds collateral to the working relationship for the laoban. The arrangement is mutually beneficial, but also lopsided. The worker is perpetually indebted to his laoban and risks exploitation. When issues arise, the worker has no reliable channel for redress.

On a macro level, these informal service relationships present another challenge. China’s 250 million migrant workers send an estimated $132 billion across the country each year. While total remittances were last measured in 2005 when they stood at $65.4, the migrant worker population has more than doubled since that time. This is a lot of money to move outside the formal economy.

Financial services are a key leverage point for individual economic mobility the world over. Safe, secure and inexpensive financial services allow individuals to plan for the future and lead more productive lives. At a time when even the Chinese government is calling the wealth gap “relatively large” and stressing the urgency of resolving income inequality, financial exclusion has meant 132 billion missed opportunities for migrant workers like Zhang Qi to improve their livelihoods.

The status quo benefits no one. Everyone has something to gain from inclusive financial services. They would deliver trusted alternatives to migrant workers, balanced economic development to the government, and new market opportunities to a forward-thinking service provider.

Globally, new technology has created promising second-generation banking services like oft-cited mobile payment platforms in Kenya, Paraguay, and the Philippines. High mobile penetration rates, extensive agent networks, and an intensive reliance on remittance payments in rural areas suggests China is similarly primed for the deployment of a national, mobile-based remittance system.

But to be effective in China, this type of financial service must embrace informality. Too often service providers create new offerings with a narrow focus on feature set, cost, or market opportunity, without consideration of how to adequately address the needs of the populations they seek to serve. Current practices and the motivations behind them should also be given careful consideration.

Here, the lessons of China’s informal service relationships, like those between workers and their laobans, are instructive. These services are foremost rooted in trust, born of mutual reliance, and built on powerful and long standing social connections. New services should complement—not compete with—these informal alternatives.

Laobans can be incentivized to promote initial adoption and new customer acquisition. Small “mom and pop” stores in rural areas, which garner the confidence of local communities, could serve as agents and key links to services beyond the village. The goal should be to provide the same trust, convenience, and ease of use that make informal services so useful to migrant workers.

After the incident, Zhang Qi was devastated and blamed himself. He realized that he had been touching his pocket repeatedly and nervously, which must have alerted the thieves. With no help from the police and his money gone, Zhang Qi traveled back to his village in Anhui Province to face the shame of arriving penniless for the Lunar New Year.